Misleading consumers about the cost of using their prepaid phone card today earned an Auckland-based company a fine of $140,000 in the Auckland District Court before Judge Cunningham.

Compass Communications Limited pleaded guilty to five charges of breaching the Fair Trading Act through its marketing of five prepaid phone cards between 1 November 2008 and 30 June 2009. The cards were WorldPhone, Talk ‘N’ Save, Go Call, V8 and Meihua.

This is the second recent successful prosecution of a phone card company by the Commerce Commission. In September 2011 Tel.Pacific New Zealand Ltd was fined $100,000 after pleading guilty to similar charges under the Fair Trading Act.

Marketing material for the Compass phone cards included posters in retailers’ windows, sale rate cards, rate comparison cards and store flags, among other items. The promotions emphasised a particular per minute rate to selected destinations, or in the case of the WorldPhone card a bulk minute rate. The fees, surcharges or conditions were in smaller fonts, or run together at the bottom of posters.

“ In practice a consumer could only get the advertised number of minutes by making one continuous phone call until all credit was used, for example a single 576 minute call to the United Kingdom using a WorldPhone calling card,” said Commerce Commission Competition branch manager, Stuart Wallace.

“The per minute rate was misleading because it depended on all the credit being used in one continuous call, and then dividing the number of possible minutes by the cost of the calling card. “

“The fees and conditions were also inadequately disclosed in relation to the prominently displayed per minute rates, or available number of minutes. For example some calling cards had a connection fee of up to 25 cents plus GST which applied to each call, while others had a daily service fee of 20 cents plus GST which applied once the card was first used,” Mr Wallace said.

“Marketing material must prominently and clearly show the full cost of any product or service”, Mr Wallace said.

“Putting additional costs and conditions of use in fine print is unlikely to meet the conditions of the Fair Trading Act. It is important that consumers clearly know the price of services they are buying so they can shop around for the best price,” Mr Wallace said.

The phone cards are frequently bought by migrants and international students who need to make international phone calls. These groups, in many cases, are unlikely to speak English as a first language. ”We consider that this increased the likelihood of consumers being misled, as these users were less likely to closely review and appreciate the fine print,” Mr Wallace said.

“Given the number of phone cards sold by Compass, their extensive distribution and the likelihood of direct losses, there was potential for real detriment to consumers,” he said.

The prosecutions of Compass and Tel.Pacific follow education initiatives in 2004 and 2005 by the Commission. Twenty two prepaid phone card companies, including Compass, were also notified that their promotion of prepaid phone cards was at risk of breaching the Fair Trading Act.

“We will take action when traders continue to breach the Act in the face of advice from the Commission,” Mr Wallace said.

Background

Section 11 of the Fair Trading Act states: No person shall, in trade, engage in conduct that is liable to mislead the public as to the nature, characteristics, suitability for a purpose, or quantity of services.

Compass Communications Limited (Compass) has a registered head office in Auckland and further offices in Wellington and Christchurch. Its business includes general telecommunications such as business and residential tolls, internet and mobile telephone services. It has been involved in the prepaid phone card market since 1999.

The Commission has been advised by industry participants that the prepaid phone card market in New Zealand has an annual turnover of $70 million-$90 million. The success of prepaid phonecards in New Zealand is partly due to the inbound travel market and the relatively high cost of mobile phone calls.

Between 1 November 2008 to 30 June 2009, Compass earned over $5 million from the five phone cards that were the subject of the court case. Its phone cards are sold throughout New Zealand, but predominantly in Auckland, Hamilton, Wellington, Christchurch and Dunedin. There are over 3000 authorised retailers selling the Compass cards including backpackers, $2 shop style stores, dairies and convenience stores through to video outlets and liquor stores.